Question

X Company prepares monthly financial statements. Its accountant recorded the following October 1 transactions and the appropriate adjusting entries on October 31:

1. On October 1, the company paid rent for the final three months of the year. Rent was $1,525 per month.
2. On October 1, the company purchased equipment that cost $20,000, borrowing the full amount from a bank. The equipment has a life of four years and a salvage value at that time of $2,000. The company will repay the loan on December 31, along with interest at $152 per month.

8. What was the effect of the accountant's entries on total assets?

9. What was the effect of the accountant's entries on Net Income in October?

Answer 1

		Effect on Total Assets	Effect on Net Income
1	On October 1, the company paid rent for the final three months of the year. Rent was $1,525 per month.	No effect. Prepaid rent would increase, cash would decrease	No effect. Effect will be at the time of adjustment
2	On October 1, the company purchased equipment that cost $20,000, borrowing the full amount from a bank. The equipment has a life of four years and a salvage value at that time of $2,000	Increase in Total Assets	No effect. Effect will be at the time of adjustment
3	The company will repay the loan on December 31, along with interest at $152 per month.	No effect	No effect. Effect will be at the time of adjustment
4	Adjusting entry to 1	Reduction in total assets by 1,525	Reduction in Net Income by 1,525
5	Adjusting entry to 2	Reduction in total assets by $ 375	Reduction in net income due to Depreciation expense for October
6	Adjusting entry to 3	No effect	Reduction in net income due to Interest expense for October